Published on:

Is a Texas Home-Equity Loan With Constitutional Defects Void or Voidable?

What happens when a Texas family discovers that the home equity loan on their home did not satisfy the constitutional requirements for homestead liens in the Texas Constitution? In the case of Wood v. HSBC Bank, the Wood family took out a home equity loan on their home in 2004. Their loan changed hands a number of times and ended up with HSBC Bank NA. In 2012, the Woods’ notified HSBC that there were defects in the loan that did not comply with the Texas Constitution. HSBC failed to cure the defects. Although it was eight years after closing when the issue was raised, the Woods’ sued HSBC to invalidate the lien on their property securing their loan and for quiet title to the property and forfeiture of all principal and interests payments made on the loan.

The Question For the Texas Supreme Court

The question before the Texas Supreme Court was whether, once the lender declined to cure the defect, was the lien void, or merely voidable. If the lien was void, then the lien was invalid and no statute of limitations applies. On the other hand, if the lien was voidable, then the four-year statute of limitations under Texas Civil Practice and Remedies Code §16.051 applies to the Woods’ case. In other words, because they did not bring suit within four years from the date the loan closed, their claim for quite title and forfeiture of all principal and interests payments made on the loan would be time barred.

A Lien With Defects is Invalid Until Cured, No Statute of Limitations Applies

The majority of the Court held that liens securing constitutionally noncompliant home-equity loans are invalid until cured and thus not subject to any statute of limitations.  In reaching it’s decision, the Court relied on the specific language of the Texas Constitution, which states that: “No . . . lien on the homestead shall ever be valid unless it secures a debt described by this
section[.]” This interpretation of the Texas Constitution’s provisions on homestead liens protects unwitting borrowers from homestead foreclosure when their liens do not comply with the constitutional requirements, since foreclosures can only be made on valid liens. As a result of this decision, homeowners have the right to raise the issue of uncured constitutionally defective home equity loans at any time. The Court further held that the Woods did not qualify for a forfeiture of the principal of the loan.

Chief Justice Hecht, in a dissent joined by two other justices, notes that the Court’s decision injects an element of instability into land titles. The Chief Justice goes on to point out that if a borrower can sue anytime during the life of a long loan, it may be difficult to produce witnesses or evidence.

It is unclear why the lender chose not to cure what was frankly, a minor default apparently worth only a few hundred dollars. At any rate, Texas borrowers with home equity loans now have a powerful new tool in their arsenal.

Posted in:
Published on:

Comments are closed.